The obligation to clear selected classes of OTC (over-the-counter) PLN interest rate derivatives in CCPs takes effect on 9 February 2017. The obligation derives from EU regulations. Banks obliged to clear such transactions in CCPs may use KDPW_CCP’s OTC_clearing service.
The obligation to clear OTC (over-the-counter) derivatives in CCPs has been imposed by EMIR and its implementing regulations.
Table 1. Types of instruments which must be cleared in CCPs as of 9 February 2017
KDPW_CCP authorisation under EMIR
On 8 April 2014, KDPW_CCP was authorised by the Polish Financial Supervision Authority (KNF) to offer services and operate clearing in the European Union for the following classes of financial instruments:
- PLN equity and debt securities – organised market;
- PLN interest rate, FX, equity and debt derivatives – organised market;
- PLN interest rate derivatives – OTC;
- PLN repo and sell/buy-back – OTC.
On 9 August 2016, the Polish Financial Supervision Authority extended the authorisation by adding the following instruments:
- EUR equity and debt securities – organised market;
- PLN debt securities – OTC;
- EUR interest rate derivatives – OTC.
According to EMIR, all clearing houses in the European Union were required to file authorisation applications with the national supervisory authorities by 15 September 2013. A CCP’s compliance with the requirements leads to its authorisation by the national supervisory authority upon the recommendation of an international college composed of representatives of the central bank and selected members of the supervisory authorities of other European Union member states and the European supervisor ESMA.
OTC_clearing service
Transactions are cleared in KDPW_CCP through novation. Novation means that KDPW_CCP takes over the rights and obligations arising from a transaction accepted for clearing; as a result, KDPW_CCP is directly liable to each counterparty (as the original trade expires).
In its OTC_clearing service, KDPW_CCP:
- clears transactions;
- participates in settlement resulting from clearing;
- manages clearing risk;
- administers collateral deposited in the clearing guarantee system;
- reports to the trade repository KDPW_TR at no extra charge.
Figure 1. OTC_clearing service
The OTC_clearing service has been developed in close co-operation with the banking sector to address the needs of market players in full compliance with the requirements of international standards and regulations.
KDPW_CCP’s advantages
It should be noted that KDPW_CCP offers high quality of services, comparable to the one provided by foreign clearing houses, at an attractive price combined with an individual approach to every client.
KDPW_CCP offers a full range of services for cleared financial instruments and accepts a wide range of collateral in cash (PLN, EUR) and securities (issued by State Treasuries, denominated in PLN and EUR). Furthermore, KDPW_CCP operates a range of mechanisms ensuring high security of clearing including access to liquidity, high own funds, segregation of positions and assets deposited by participants, and porting of clients’ positions and collateral.
To stimulate market activity and further improve liquidity of OTC trade, KDPW_CCP offers an attractive system of fees, which may in the long run have particular importance when clients select banks for access to the CCP service (client clearing). Mandatory central clearing of OTC PLN interest rate derivatives for some clients takes effect as early as 9 February 2018.
Figure 2. Advantages of KDPW_CCP
In order to address the expectations of clearing members, KDPW_CCP has drafted amendments of the Rules of Transaction Clearing (non-organised trading) which will allow it to clear transactions for which no variation margin is charged to secure exposure under the transaction but instead the settlement amount is applied in marking-to-market of the trade. This will provide banks with additional benefits when clearing trades in KDPW_CCP owing to lower capital requirements. The modifications will take effect following approval by the Polish Financial Supervision Authority (KNF).
OTC market in Poland
The OTC derivatives market in Poland allows financial institutions and companies to hedge against interest rate and FX risks. It also allows them to take specific market risk. Furthermore, OTC derivatives which generate cash flows similar to the underlying allow for arbitrage. As the OTC market is decentralised, banks are its main organisers and participants. The notional outstanding at the end of 2015 of domestic banks on the OTC derivatives market was close to PLN 1.9 trillion (according to NBP data).
KDPW_CCP clears and guarantees the clearing of OTC derivatives and repos since December 2012. Thus, KDPW_CCP started to offer services for the interbank market, mainly with a view to mitigate the risk of counterparty default and to stimulate this market segment. Currently, 16 biggest banks active on the Polish market are KDPW_CCP participants in OTC clearing and the notional of OTC transactions cleared by KDPW_CCP is over PLN 200 billion.
Figure 3. Notional of PLN OTC instruments sent for clearing to KDPW_CCP (PLN mn)
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